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Chapter 1 – Starting A Proprietorship

Chapter 1 – Starting A Proprietorship. What is Accounting? (see page 4) Do you know someone who works in accounting? Do you have a job that provides a paycheck? Your company uses accounting to keep accurate records for each employee. Chapter 1 – Starting A Proprietorship.

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Chapter 1 – Starting A Proprietorship

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  1. Chapter 1 – Starting A Proprietorship • What is Accounting? (see page 4) • Do you know someone who works in accounting? • Do you have a job that provides a paycheck? Your company uses accounting to keep accurate records for each employee

  2. Chapter 1 – Starting A Proprietorship • First nine chapters will take you through the entire accounting cycle for a Service business organized as a proprietorship • Chapter 1 describes: • How proprietorship is started • The transactions that occur when the business is organized • How the accounting equation is used to analyze these transactions • How to create a balance sheet and the relationship of the balance sheet to the accounting equation

  3. Encore Music – Business that is used for chapters 1-9 • Chart of Accounts – found on page 3 – will be used for the first 9 chapters. • Chart of accounts is used for determining the classification of accounts and to identify which accounts are temporary and which are permanent • Chart of accounts is extremely important to companies because they drive the accounting system. This is how businesses track various sources of income and expenses. • Why would a business organize as a proprietorship? • What are characteristics of a proprietorship? • Can you name some service businesses in Middleville?

  4. Lesson 1-1: THE ACCOUNTING EQUATION Lesson 1-1, page 7

  5. TERMS REVIEW Accounting – Planning, recording, analyzing and interpreting financial information Accounting System – A planned process for providing financial information that will be useful to management Accounting Records – Organized summaries of a business’s financial activities Service Business – Business that performs an activity for a fee Proprietorship – Business owned by one person Lesson 1-1, page 8

  6. TERMS REVIEW – cont’d Asset – Anything of value that is owned Equities – Financial rights to the assets of a business Liability – An amount owed by a business Owner’s Equity – The amount remaining after the value of all liabilities is subtracted from the value of all assets Accounting Equation: Assets = Liabilities + Owner’s Equity Business Entity Concept – A business’s financial information is recorded and reported separately from the owner’s personal financial information Lesson 1-1, page 8

  7. Follow-up: • Can you list assets you or your parents own? • Can you identify possible liabilities you or your parents have? • Can you identify assets owned by the school?

  8. Lesson 1-1: THE ACCOUNTING EQUATION Lesson 1-1, page 7

  9. TERMS REVIEW Lesson 1-2 Transaction – a business activity that changes assets, liabilities or owner’s equity Account – A record summarizing all the information pertaining to a single item in the accounting equation Account title – The name given to an account Account balance – The amount in an account Capital – Account used to summarize the owner’s equity in a business Unit of Measurement Concept – Stating numbers that have common units of measurement; i.e. U.S. dollars. (see page 9) Lesson 1-2, page 12

  10. Lesson 1-2: How Business Activities Change the Accounting Equation – General Info • Assets = Liabilities + Owner’s Equity • Equation must always remain equal • When reading transactions, Received Cash always means cash increases; Paid Cash always means cash decreases • Transactions don’t always affect both sides of the equation • When analyzing transactions, always • Read the transaction • Identify the accounts • Classify the accounts (Asset, Liability or Owner’s Equity

  11. RECEIVING CASH Transaction 1 August 1. Received cash from owner as an investment, $10,000.00. Lesson 1-2, page 9

  12. PAYING CASH Transaction 2 August 3. Paid cash for supplies, $1,577.00. Transaction 3 August 4. Paid cash for insurance, $1,200.00. These two transactions only affected the asset side of the equation – demonstrating that you won’t always have entries on each side of the equation Lesson 1-2, page 10

  13. TRANSACTIONS ON ACCOUNT Transaction 4 August 7. Bought supplies on account from Ling Music Supplies, $2,720.00. Transaction 5 August 11. Paid cash on account to Ling Music Supplies, $1,360.00. Lesson 1-2, page 11

  14. TERMS REVIEW Balance sheet – Common financial statement that reports assets, liabilities and owner’s equity on a specific date Going Concern concept – This is applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely. (see page 13) Lesson 1-3, page 15

  15. Lesson 1-3: PREPARING A BALANCE SHEET 1. Write the heading. 1 2. Prepare the assets section. 3. Prepare the liabilities section. 2 3 4 4. Prepare the owner’s equity section. 6 5 7 8 5. Add amounts and compare the totals. 6. Rule single lines. 7. Write the totals. 8. Rule double lines. Lesson 1-3, page 14

  16. More on Balance Sheets • Financial statements usually have a three-line heading which answers the questions: who, what and when. • Write account titles in full – abbreviations should be avoided whenever possible to prevent misunderstanding.

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